Taking stock

A new law will take Colorado crowdfunding to the next level

By now, most people know they can help a favorite local business or a startup online at sites like Indiegogo or Kickstarter, and maybe get a T-shirt for their trouble.

But a new law will soon allow small Colorado businesses to offer such helpers much more: stock in the companies. House Bill 1246, sponsored by Rep. Pete Lee, D-Colorado Springs, and Speaker Pro Tem Dan Pabon, D-Denver, sailed through the divided legislature with only one "no" vote and has been signed by Gov. John Hickenlooper. It goes into effect in August.

Lee is jubilant about the law, calling it "a keystone bill of the legislative session." He says he got the idea for the bill from Michael Shuman, author of the book Local Dollars, Local Sense.

Allowing people to invest in small local companies will build the Colorado economy from the ground up, Lee says, and help replace old financing options that have become harder to come by, such as home equity loans, credit cards and gifts from friends and family. Other states have adopted similar laws since the federal government began allowing such arrangements a few years ago.

"My hope is that [the new law] spurs the development and expansion of small businesses, and in essence it's the democratization of investment capital," Lee says.

He's not the only one who's excited about the law's possibilities, but HB1246 isn't as simple as it seems. And it comes with risks.

Jared Ertle, corporate finance coordinator for the Colorado Division of Securities, says that HB1246 wouldn't have been possible 10 years ago because it relies on today's technology.

Under the law, a company interested in selling equity connects with an "online intermediary" that will function similarly to Kickstarter. (No such sites exist yet.) The company will need to meet some federal rules, and cannot raise more than $1 million in 12 months. Donations from most people (those who aren't "accredited investors," a designation reserved for the wealthy) cannot exceed $5,000.

The company must put all the money in an escrow account so that it can be refunded if a set minimum isn't raised. The company will have to go through some paperwork and disclosures, pay a fee, and keep records — including those showing that 80 percent of any money raised is spent in Colorado, as required.

Companies could sell any kind of equity: stocks, bonds, revenue shares. Compared to the old rules, Ertle says, it's all pretty simple.

"This new bill," he says, "it's crafted in a way that if you are complying with the bill and Colorado law, you almost certainly are going to be complying with federal law as well."

But Thomas Duening, the El Pomar Chair of Business & Entrepreneurship for the University of Colorado at Colorado Springs, says that investors should think carefully before investing in a company.

"It's kind of the Wild West," the professor says, "the frontier of investing that most people don't know how it's going to work out."

Duening has several warnings. First, he notes that most small companies are set up as "pass-through" taxing entities, like LLCs. If you own stock in such a company, and it turns a profit, you owe taxes. If the company is really successful, that could add up quickly, and the company isn't required to pay its shareholders anything unless and until the company is acquired. And unlike the stock market, you can't sell your shares.

"In theory," he says, "the potential loss is infinite."

Companies, he says, will also want to think twice. Colorado has strong minority shareholder laws that require that every shareholder agree to major changes, like selling the company.

Despite the potential downsides, many are excited about HB1246.

Take, for instance, former congressional candidate Dave Anderson, who is the president/chairman of the Colorado Springs Public Market, which is planned for the old Gazette building.

Anderson says that in addition to offering local food, he wants the market to serve as one of those online intermediaries, selling local stock. Like Lee, Anderson thinks the economy will be helped by focusing on local investment.

"Spending money to bring high-fliers in does not work," he says, speaking of efforts to attract large employers to the area. "We are all much better served by supporting the businesses that are here, and want to be here."

Todd Baldwin, president and founder of Red Leg Brewing Company, currently has an Indiegogo campaign to raise money for an expansion. (Disclosure: Associate publisher Carrie Simison is a guest bartender at the brewery.) Asked about this new model, he says he thinks it's a great idea and a wonderful way to grow local business. He says he wouldn't try it at this point because he doesn't want to sell equity in a business that he's put so much of his own money into. But if he had it to do over again, he'd try the new model — breweries are very expensive to set up on the front end, and he needed all the help he could get a few years ago.